Cash-strapped retirees opt for equity release


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Retired homeowners are using equity stored in their home as a temporary 'weapon of last resort' to battle the recession.

Newcastle Building Society's equity release service says one in ten customers who signed up to 'lifetime mortgages' at the end of February was seeking short-term cash to boost retirement income.

Head of equity release services at the Newcastle, John Digman, says: 'Income from traditional retirement vehicles such as pensions, investments and interest on savings is depleting, so it seems a growing number of retirees are making use of equity release as a stop-gap.'

Conventionally, equity release has been seen as a lifetime option with the money paid back from their estate when the borrower dies. But these borrowers are looking to borrow over a shorter term.

Quick fix: Many retired homeowners are in need of extra cash

Quick fix: Many retired homeowners are in need of extra cash

'They may be waiting for investments to mature or planning to sell a holiday home they can still enjoy. Often the plan is to release some capital in the short-term, wait for the property market to recover and then pay off the debt and downsize.'

This 'quick fix' tactic has only been feasible in the past five or so years since the schemes have become more flexible.

While most lifetime mortgage providers, including Norwich Union and Prudential, impose early repayment charges for the life of the loan - which means the life of the borrower - others now charge them only for the first five or ten years. Godiva Mortgages, owned by Coventry Building Society, charges no penalties at all.

But in return for flexibility, borrowers are charged higher interest rates - and on lifetime mortgages these are fixed for the duration of the loan.

According to Key Retirement Solutions, Godiva charges 6.59 per cent on loans with no early repayment charges. This compares with Stonehaven, which levies charges for the life of the loan and charges 6.08 per cent annually.

But using equity release for shortterm borrowing is dangerous warns Teresa Fritz at consumer group Which?: 'Falling house prices adds another dimension to equity release, which is already a high-risk product. If you take a lifetime mortgage for just five years, you are banking on house prices rising faster than the debt will grow under the effect of compound interest. Like any other investment, this is just a gamble.'

The minimum age for equity release is 55. If a homeowner of this age borrowed £40,000 against a property worth £200,000 (20 per cent), they would pay a fixed rate of 6.85 per cent with New Life Mortgages - as well as set up costs of between £1,000 and £1,500.

If the borrower then settled the loan in five years, when the penalty period expires, the balance would have grown to £56,265. If their property had also fallen in value by 10 pc more (£20,000) during this time, the homeowner's 'retirement pot' would be short by over £76,000.

Financial regulation states advisers must 'establish suitability' of the schemes. This means exhaustingall other options first such as investments, savings and other forms of 'serviceable' borrowing which is repaid every month.

If you can't pay the loan back when you intended, the debt will continue to mount. For example, if the same

55-year-old is unable to repay the £40,000 loan plus interest by the time they are 60 and takes the debt to their grave aged 80, the amount owed would have ballooned to £220,638 - more than the original property value. This makes it crucial to ensure scheme providers offer a no-negative equity guarantee, which is a requirement of all members of equity release trade body, Ship (Safe Home Income Plans).

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